Navigating personal well-being often means balancing your wants and needs with external factors. Similarly, businesses aim to harmonize their internal operations with an unpredictable market.
Internally, companies can train employees, modify budgets, and streamline processes. But handling external challenges, especially from economic or political disruptions, is a trickier task.
That’s where a PEST analysis comes in. More than just a catchy name, it’s a strategic tool businesses use to understand and react to broader market forces. And you can bring this tool down to the project management level to ensure every team is prepared to address real-world challenges.
What’s a PEST analysis?
A PEST analysis evaluates the political, economic, social, and technological factors that impact an organization. Business leaders can leverage this more comprehensive understanding of external impacts when crafting strategic plans.
While a PEST is most commonly used by organizational leaders to create better long-term and high-level plans, project managers can also conduct this analysis to understand how these factors might impact a project’s outcome.
Sometimes considered an alternative to a SWOT analysis — which evaluates a company’s strengths, weaknesses, opportunities, and threats — the best approach is to pair the two to enjoy a thorough and data-driven understanding of both the internal and external factors that impact your team.
The 4 PEST analysis elements
No matter your industry, the following four factors can greatly impact how successful your broad initiatives and individual projects are. And understanding each element well helps you conduct accurate research when completing this analysis.
This refers to the impact of government policies, regulations, and political stability on an organization. It could include tax policies, labor laws, environmental regulations, trade restrictions, and political stability or instability that could lead to a crisis. In particular, watch out for the following:
- Legislation: National and international law can significantly influence a business’s operations and reputation.
- Political stability: The political environment’s stability can influence investors’ confidence.
- Trade policies: Governments can affect market opportunities through trade agreements or tariffs.
- Tax policies: Tax regulations and incentives can significantly impact an organization’s bottom line.
- Environmental regulations: Governmental policies regarding environmental sustainability and protection can dramatically influence a company’s operations.
Crisis managers examine economic factors like the following to better understand how the company might perform in the future and what to watch for:
- Economic systems: The type of financial system a country operates under significantly influences a company’s budgeting and scaling plan and execution.
- Market conditions: Market conditions directly affect a company’s profitability and business continuity decisions.
- Economic indicators: Key indicators like gross domestic product (GDP), consumer price index (CPI), and the balance of trade offer insights into the economic health of a country or region.
- Economic cycles: The economy often cycles through periods of growth and decline, affecting business performance and consumer preferences.
- Monetary policy: Actions a country’s central bank takes to control the money supply, often to mitigate inflation or stimulate economic growth, play a significant role in a company’s financial stability.
Social factors affect the demand for a company’s products or services, and these include:
- Demographic changes: Shifts in population demographics often influence market demand and consumer behavior.
- Cultural diversity: Cultural diversity within a market can affect consumer preferences, and understanding various cultures helps companies communicate with diverse customer bases.
- Social movements: Social movements can cause a crisis by influencing purchasing behaviors.
- Lifestyle trends: Lifestyle and widespread culture changes can create new market opportunities.
- Consumer attitudes and behaviors: Consumer attitudes toward products, brands, and industries can impact a company’s reputation and public relations.
Addressing technological factors affecting your business is a must in today’s tech-forward world. Here are some of the more common factors influencing company success:
- Innovation: Rapid technological advancements like artificial intelligence, machine learning, and blockchain disrupt traditional business models and enhance preparedness for new opportunities for innovative companies.
- Digital transformation: The shift toward digital platforms transforms how businesses operate and connect with their customers.
- Cybersecurity: As businesses become more digital, the threat of cybercrime increases.
- Automation: Automation technologies like robotics and AI can increase efficiency and productivity, reducing labor costs and human error. But there are potential drawbacks, including job loss and ethical concerns.
- Tech regulations: Governments worldwide are tightening regulations on technology companies, affecting data privacy, competition, and taxation. These changes can have significant implications for businesses operating in the tech sector.
PEST versus PESTLE
The PESTLE analysis expands on the PEST framework by incorporating legal and environmental factors. This broader perspective allows for a more comprehensive understanding of the macro-environmental factors, like how a new legal legislature or severe natural disaster might affect a company’s operations.
When to use a PEST analysis
A PEST analysis is particularly effective when venturing into new markets, considering new products or services, and assessing a response to a potential crisis. Here’s more on some of the most applicable situations:
- Project planning: Project managers can conduct a PEST analysis to determine how influential external factors might affect project execution.
- Strategic planning: Leaders often use this analysis type to create data-driven and comprehensive strategic business plans.
- Business expansion: A company that’s expanding into a new market or region can use this analysis to determine how to do so wisely — or whether it’s even viable.
- Product launch: When considering influential external factors, you can create more accurate and thoughtful product launch plans.
- Merger and acquisition: Before a merger or acquisition occurs, a PEST analysis provides valuable insights into the target company’s environment, highlighting potential risks or benefits associated with the move.
You might also pair your PEST with other analysis methods like the McKinsey 7S model or a gap analysis to better understand where your company sits across various factors.
How to do a PEST analysis: 4 steps
If you’re convinced this is the right analysis type for you, here’s a simple four-step guide to get you started. Work closely with leaders across your organization to ensure you consider various perspectives and a less subjective/siloed knowledge base.
1. Identify the scope
Clearly define the boundaries of your analysis, determining what you’re trying to understand and why. For instance, if you’re a tech company looking to launch a product in Europe, your scope might be “the technological landscape of European countries in 2023.”
Also consider potential variations within your scope. Different regions or segments within an industry might have unique political, economic, social, or technological factors — the tech environment in Western Europe might differ from Eastern Europe, for example.
2. Brainstorm PEST factors
Working with fellow leaders, brainstorm assumptions and ideas for each PEST component:
- Political: Consider factors like regulatory environments, trade tariffs, political stability, and government policies.
- Economic: Think about inflation rates, economic growth, exchange rates, and unemployment levels.
- Social: Dive into cultural trends, demographics, societal values, and consumer behavior.
- Technological: Evaluate current and emerging technologies, research and development landscapes, technical infrastructure, and the rate of technology adoption.
Remember, it’s not just about listing these factors. Ask yourself: “How might these factors affect our business or project?”
3. Conduct thorough research
Start by setting a timeline for your research to ensure efficiency and avoid getting bogged down by excessive data. Then, take your brainstormed list and conduct and analyze research to accurately understand how each item might affect the business. Use both primary and secondary research sources, like surveys and interviews alongside published reports, articles, and industry studies.
When analyzing the data, look for connections or patterns between different factors. How might a political decision impact technology adoption in a region, for example, or an economic crisis affect social behaviors?
Be as objective as possible in your analysis, avoiding confirmation bias where you only see data that aligns with your preconceptions.
And use visualization tools like charts and graphs to better understand and explain complex relationships or trends.
4. Report and act
Summarize your findings in a structured manner, like in a PEST table or matrix, for easy reference. And include actionable recommendations based on the results. If your research shows a rising trend in remote work due to technological advancements, for example, you might consider investing more in remote work solutions.
Then, share your report with relevant stakeholders, ensuring they understand both the findings and their implications. Regularly review and update your PEST analysis to reflect external shifts.
A PEST analysis example in project management
While valuable for crisis management and strategic business planning, external factors also influence individual initiatives, and project managers can benefit from evaluating these factors during the project planning phase.
Here’s an example, using the case of a project manager overseeing the launch of a new cloud-based software platform for small businesses:
- Political: Regulations around data handling and cloud storage influence project deliverables and execution. With countries having their own data protection laws, understanding and adhering to these regulations becomes essential for our cloud platform, especially if we plan to offer services globally.
- Economic: The state of the economy influences small businesses’ willingness and capacity to adopt new technology. Economic downturns or upturns, access to venture capital for tech startups, and prevailing market trends can shape the adoption rate of our platform.
- Social: As mentioned, small businesses might hesitate to adopt new technologies due to limited resources or industry-specific technological ignorance. The prevailing sentiment toward cloud technology, trust in data security, and the perceived value of tech solutions for business processes will guide our market positioning and outreach strategy.
- Technological: Factors like the speed of internet connections, advancements in encryption technology, integration capabilities with other platforms, and the general pace of tech innovation will dictate the features and adaptability of our cloud-based solution.
Offer your project teams the best tools
No matter the macroeconomic factors affecting your business, Tempo offers various powerful, user-friendly tools and templates to help your management team mitigate, react, and recover effectively. Try Roadmunk for roadmap planning, Custom Charts for data visualization, and Timesheets for task tracking. Sign up today.